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Better E-Commerce Buy: JD.com or MercadoLibre?

Think you’ve missed the boat on Amazon? Try these overseas companies on for size.

As the incredible returns of Amazon.com(NASDAQ:AMZN) have shown, it can pay to invest in e-commerce. While e-commerce is thriving in the U.S., it is perhaps even more exciting in developing markets like China and Latin America, where internet penetration is lower, but the growth potential higher. As such, investors should get to know two leading e-commerce platforms in these regions: JD.com(NASDAQ:JD) and MercadoLibre(NASDAQ:MELI). But which is the better buy today?

Founder-led companies

One common trait of JD.com and MercadoLibre is that both are run by their relatively young founders. JD.com was founded by CEO Richard Liu in 2004, who is only 43 years old. MercadoLibre was founded in 1999 by CEO Marcos Galperin -- who is 46 -- when he was in business school at Stanford. As of last year, Liu owned 15.8% of JD.com shares (but 80% of the voting power), while Galperin owns roughly 9% of MercadoLibre. These companies are both run by passionate founders with skin in the game, which we love here at the Fool.

Image source: Getty Images.

Demographics

JD.com operates in China, where it is the No. 2 player behind Alibaba(NYSE:BABA). China has roughly 751 million internet users, which amounts to an internet penetration rate of only 54.3%. However, as China is so large and much of its population is mobile-savvy, its e-commerce market is over $1.1 trillion, the largest e-commerce in the world. China's e-commerce market makes up roughly 23.1% of its retail sales today, but that is expected to grow to over 40% by 2021.

MercadoLibre is the leading e-commerce player in South America and Mexico. As of June 2017, internet penetration in South America was around 65%. The e-commerce market in Latin America is much smaller than in China, at only $57 billion in 2016, but should grow to $85 billion in 2019, according to Statista.

Each company is well positioned in markets that should grow substantially in the years ahead.

Competitive position

Alibaba has an estimated 51.3% market share, while JD.com has roughly 32.9%, according to Analysys International Enfodesk. However, JD has been closing the gap fast, growing from just a 17.7% market share in 2014.

JD has been able to expand by focusing on quality brands, building a first-class logistics platform, and partnering with internet giant Tencent(NASDAQOTH:TCEHY), which owns a substantial stake in JD. Those efforts of the past few years now seem to be working extremely well.

MercadoLibre is the undisputed leader in Latin America at the moment, generating triple the number of visitors to its nearest competitor. However, rumors of Amazon's increased ambitions in Brazil sent MercadoLibre shares down this past fall. The stock has since recovered after the company posted a great earnings report shortly thereafter. MeradoLibre has strong roots in Latin America and knows the idiosyncrasies of the culture, for now at least, this offers it a clear advantage over Amazon.

Growth

In e-commerce, the name of the game is growth. In this respect, we can see that both platforms have been performing exceptionally well: JD.com posted 39.2% growth in its most recent quarter, while MercadoLibre bested even that with a whopping 60.6% growth rate, marking an acceleration over the past year:

Margin

Of course, part of MercadoLibre's strong revenue growth has come from its decision to give customers free shipping and to pivot away from an eBay(NASDAQ:EBAY) type of asset-light platform into a logistics-and-fulfillment role. As you can see, these changes greatly lowered the company's net margin from the mid-20s two years ago down to just 7.46% last quarter.

Of the business model change, MercadoLibre CFO Pedro Arnt said, "E-commerce is incredibly sensitive to economies of scale because of logistics and other factors, and the quicker we can get to a top line that is multiples what it is today, the closer we get to some sort of escape velocity where we really feel comfortable with our position."

Still, MercadoLibre wins here on both growth and margins. However, the next factor changes the story drastically ...

Valuation

With extremely low (and changing) margin structures, it's probably best to value each company on a price-to-sales ratio. Here, JD clearly wins, with just a 1.4 times price-to-sales ratio, compared with MercadoLibre's 14.1.

I am personally valuation-sensitive and fearful of Amazon, so JD.com gets the slight nod for me. But both companies have a lot going for them, and I wouldn't fault you for choosing MercadoLibre -- or better yet, both.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Billy Duberstein owns shares of Alibaba, Amazon, JD.com, and Tencent Holdings. The Motley Fool owns shares of and recommends Amazon, eBay, JD.com, MercadoLibre, and Tencent Holdings. The Motley Fool has a disclosure policy.